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Zirax plc

 ('Zirax' or the 'Company')

Interim Results for the six months to 30 June 2008

Zirax, the AIM quoted speciality chemical company focused on the development, production and sale of oilfield process chemicals and de-icing solutions, announces its interim results for the six months to 30 June 2008.

Highlights

Financial Performance

• Total revenues up 13% to $15.1m (2007: $13.3m)

• Pre-tax loss was $0.1m (2007: profit $1.9m)

• Oilfield process chemical revenues increased to $12.8m (2007: $7.4m)

• De-icing solutions revenues were $0.9m (2007: $4.7m) 

• $8.9m cash reserves at 30 June 2008

Operating Highlights

• Demand continues to exceed supply 

• Principal limestone supplier acquired near our Volgograd plant to secure the supply of high quality raw materials and provide greater cost control in the future

• Awarded two new contracts to provide our product to the Azeri-Chirag-Guneshli oilfields in Azerbaijan and increase the supply of product to Bucharest City Council, Romania

• Fenlon Dunphy appointed the new CEO of Zirax plc

• Sixth consecutive award of Moscow de-icing contract

Sir Michael Oliver, Chairman commented: 

'This has been a challenging period for the business; while demand for our range of premium grade products remains strong, a combination of factors including a very mild winter in Russia, significant cost increases and the delay of the Rosignano plant coming fully on line has reduced profitability. Fundamentally, the business continues to be in a very strong position to capture an increasing share of the oilfield services and de-icing markets, however, in the short term these factors will have a negative impact on the Group's trading performance.'

Enquiries:

Zirax	Fenlon Dunphy, CEO	T: +44 (0)20 7868 1694
Hanson Westhouse Limited	Tim Metcalfe	T: +44 (0)20 7601 6100
	Richard Baty
Metropol (UK) Limited	Alexander Selegenev	T: +44 (0)20 7439 6880
Cardew Group	Tim Robertson	T: +44 (0)20 7930 0777
	David Roach
	Daniela Cormano

  

Interim Review

Introduction

Zirax, the speciality chemical company focused on the development, production and sale of oilfield process chemicals and de-icing solutions recorded an increase in sales of 13% for the first six months of 2008. However, profitability was reduced due to a number of factors; an abnormally mild winter in Moscow; significant increases in operating costs, particularly distribution costs which initially had to be absorbed by Zirax; and a delay in the delivery of sufficient capacity from the new Rosignano plant coming on line. With demand for our premium range of products still outstripping supply these problems are short term, but they will result in profits for the full year being below market expectations.

The overall market environment remains extremely favourable. The Company is in a strong position having doubled capacity in the last three years, invested in key strategic acquisitions whilst retaining a strong balance sheet and reduced its dependence on the more seasonal de-icing business. The issues that have arisen in the first half of this year will have an impact on results, however, the strength of Zirax's position in its chosen markets and its strategic objectives remain unchanged. 

Financial Review

Total revenues for the six months to 30 June 2008 increased 13% from the equivalent period in 2007 to $15.1m. Zirax's strategy to grow the oilfield process chemicals segment of the business delivered sales of $12.8m, growth of 74% in this segment compared to the same period last year. As a result, and owing to a milder winter, sales of high performance de-icing products decreased to $0.9m, compared with $4.7m in 2007. The remaining industrial sector accounted for $1.4m of revenue, a 17% increase from $1.2m in 2007.

The world economy has been suffering inflationary effects and the inflationary impacts in Russia are greater than in most other countries. Russian inflation is running at close to 20%, and power costs are predicted to increase by up to 20% per annum over the coming years, while distribution rates have already increased by up to 25% this year. Zirax's cost of sales increased from $6.7m in 2007 to $7.9m in 2008. Distribution, sales and marketing expenses also increased to $4.7m compared with $3.0m in 2007, whilst General and Administrative expenses increased to $2.8m in 2008 compared with $2.0m in 2007. Whilst in general we seek to pass on higher costs to our customers in the form of price increases, initially some costs were absorbed by Zirax leading to a reduction in our operating margin.

As expected, the newly acquired Solith in Austria contributed an overall loss of $(0.4)m in the first half of 2008, in part reflecting a $(0.1)m effect of the fair value uplift of Solith's fixed assets and inventory.

Overall the Group recorded a small operating loss for the period of $0.3m, compared with a profit of $1.7m in 2007, and loss before tax was $0.1m compared with a profit of $1.9m in 2007.

Despite the loss before tax for the period, there is a tax charge of $0.5m as a result of profits arising in Russia.

Investment in fixed assets of $0.8m in the first half of 2008 primarily relates to the continued investment in our Volgograd plant and facility.

Cash and cash equivalents increased from $8.2m at 31 December 2007 to $8.9m at 30 June 2008. Cash from operations was $3.9m, with the Group making a net cash investment in assets of $1.2m and net cash payment against funding of $2.1m. The Group has sufficient cash funds to meet its foreseeable business plans. Any surplus funds are invested, but we do not undertake speculative treasury transactions.

Basic EPS was a loss of 0.35 cents, compared with earnings of 0.83 cents in 2007. In line with the Board's stated strategy no dividend will be payable for the period. It remains the Board's view that the business is in a growth stage and, as such, it needs to maintain cash to fund its development.

Operating Review

Despite challenging conditions in the global economy and the impact of external factors on our business, Zirax's underlying sales performance remained strong, with significant untapped demand for our products, from the oilfield markets in particular, driving revenues.

The supply of product from Rosignano, Italy has been delayed due to technical issues with the production process. A programme has been put in place to resolve this matter and we are hopeful that we will achieve an increase in supply later this year with full capacity being reached by the middle of 2009. Since Rosignano's opening in November last year, we have had to control the Group's potential sales because of the lack of available capacity to supply our customers. As a result, Zirax has also incurred extra distribution and administration costs, relating primarily to ensuring certain key customers are supplied. 

With the increased capacity at Volgograd and the Rosignano supply issues being resolved we believe that Zirax is well positioned to take full advantage of the increasing global demand for our products. 

The increase in revenue over the period is mainly as a consequence of our strategy to decrease our dependence on the de-icing markets, and in particular our contract with Moscow City Council. Zirax has successfully changed its sales mix through focusing on the significant opportunities from growing revenue streams in the oilfield services markets and increasing our ability to source product from multiple locations. As such, we are particularly pleased to report a 74% increase in sales from this segment during the period, and remain confident that we can build on the success of our announcement earlier this month that we had signed a supply agreement to provide our product for use in the Azeri-Chirag-Guneshli oilfields in Azerbaijan. Despite the tougher market conditions in the wider economy and the recognition that in our own market we need to recover our margins, Zirax believes that it has created a solid base to build from and is actively seeking to widen the product and service offering to this market.

Sales decreased significantly in the de-icing segment as a result of our move towards the oilfield markets, but also from the extremely mild 2007/08 winter season in Moscow. De-icing is normally a good margin business for Zirax so this fall in sales affected our bottom line in the period. Despite this, we have secured for the sixth consecutive year the tenders to supply the City of Moscow with a reduced volume of 23,000 MT for the upcoming winter season, representing $6.6m in revenues. This is a 5,000 MT reduction in sales compared to the previous winter season as Moscow still has inventory from 2007/08. As announced earlier this month we have signed an agreement with Bucharest City Council to increase the supply of product having been successfully trialled in Romania last year. 

Earlier in the year we acquired Austrian company Solith which gives Zirax a foothold into Central and Western European markets where we believe there are substantial opportunities for development. At the time of acquisition Solith was solely dependent on winter de-icing revenue, but in the first half of 2008, 49% of Solith's business came from new non-winter related revenues. The Solith results therefore have equally contributed to the de-icing and industrial segments. It was also known and understood that the business was loss making and would in the short term remain so, however we look forward to Solith achieving profitability in the near future. 

On the costs side, we also announced earlier this month that we are acquiring our principal limestone supplier; this investment will be completed later in 2008. This quarry, near our plant in Volgograd, will secure our supply of high quality raw material and provide us with greater control over future cost. For distribution, initially it has not been possible to pass on the increased costs to most of our clients, who are typically on contracts for one year; however, there is the opportunity to offset some of this in the second half and beyond. 

Board Change

Having served six years as Zirax's Chief Executive Officer, it has been agreed with Valery Andosov that he will step down from his post and leave the Board in order to pursue other interests. Fenlon Dunphy has been appointed as CEO with immediate effect and during an interim period will also maintain responsibility for all financial matters. Mikhail Petrushin, Executive Director of Zirax plc, will take over responsibility for the Russian operations, becoming General Manager of Zirax LLC, our principal subsidiary company. Valery will provide a consultancy service to the business for an interim period in order to aid the transition. The Board is grateful to him for the success he has brought the Company to date and wishes him well for the future.

The Board is also very grateful to all the staff who have contributed to the Company's growth and looks forward to continuing to work closely with them as we enter a key period in Zirax's future development.

Outlook

This is a very frustrating period for the Zirax management team. The demand for our products is strong, but due to a combination of factors, most of which are external, the Company has been unable to take full advantage of this demand. The key issues are being addressed: we expect the Rosignano plant to come fully on line in 2009, higher costs are being passed on or being mitigated through other channels; and new revenue streams will substantially reduce the significance of the Moscow contract. While the results for 2008 will be below expectations, Zirax remains in an excellent position to capitalise on the investments it has made to increase its market share. Consequently, the Board remains confident in the Group's longer-term trading outlook.

Sir Michael Oliver

Chairman

 

  Independent review report to Zirax plc

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008, which comprises the Consolidated Income Statement, Consolidated Balance Sheet, Consolidated Cash Flow Statement, Consolidated Statement of Changes in Shareholders' Equity and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the AIM Rules for Companies which require that the financial information must be presented and prepared in a form consistent with that which will be adopted in the company's annual financial statements.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the AIM Rules for Companies and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules for Companies.

PricewaterhouseCoopers LLP
Chartered Accountants

London
29 September 2008

 

 

  Consolidated Income Statement

For the Period Ended 30 June 2008

    

	Notes	Six months to 30 June 2008	Six months to 30 June 2007	Year to 31 December 2007
		Reviewed	Reviewed	Audited
		$'000	$'000	$'000
Revenue	3	15,065	13,287	30,665
Cost of sales		(7,887)	(6,682)	(14,628)
		----------	----------	----------
Gross profit		7,178	6,605	16,037
Distribution expenses		(4,687)	(3,003)	(6,777)
General and administrative expenses		(2,757)	(1,951)	(4,521)
		----------	----------	----------
Operating (loss)/profit		(266)	1,651	4,739
Interest receivable		267	229	495
Interest payable and similar charges		(290)	(10)	(177)
Net foreign exchange gain		171	53	240
		----------	----------	----------
Net finance income		148	272	558
(Loss)/profit before taxation		(118)	1,923	5,297
Taxation	5	(484)	(492)	(1,559)
		----------	----------	----------
(Loss)/profit for the period		(602)	1,431	3,738
		======	======	======
Earnings per share expressed in US cents per share:
Basic	4	(0.35)	0.83	2.17
		----------	----------	----------
Diluted	4	(0.35)	0.83	2.17
		======	======	======

                

Consolidated Balance Sheet

At 30 June 2008

		30 June 2008		30 June 2007		31 December 2007
		Reviewed		Reviewed		Audited
		$'000		$'000		$'000
Non-current assets
Property, plant and equipment		12,621		9,452		10,907
Intangible assets		1,189		204		225
Trade and other receivables		6,414		2,759		6,104
Deferred income tax assets		211		152		202
		----------		----------		----------
Total non-current assets		20,435		12,567		17,438
		----------		----------		----------
Current assets
Inventories		5,445		2,719		3,199
Trade and other receivables		6,015		4,167		11,524
Cash and cash equivalents		8,928		8,603		8,156
		----------		----------		----------
Total current assets		20,388		15,489		22,879
		----------		----------		----------
Current liabilities
Short-term borrowings		2,496		-		4,153
Trade and other payables		6,712		1,963		5,633
Current tax liabilities		271		201		891
		----------		----------		----------
Total current liabilities		9,479		2,164		10,677
		----------		----------		----------
Net current assets		10,909		13,325		12,202
		----------		----------		----------
Non-current liabilities
Long-term borrowings		1,024		-		-
		----------		----------		----------
Total non-current liabilities		1,024		-		-
		----------		----------		----------
Net assets		30,320		25,892		29,640
		======		======		======
Shareholders' equity
Share capital		2,965		2,965		2,965
Share premium		11,194		11,194		11,194
Other reserves		7,500		4,777		6,218
Profit and loss account		8,661		6,956		9,263
		----------		----------		----------
Total shareholders' equity		30,320		25,892		29,640
		======		======		======

Consolidated Cash Flow Statement

For the Period Ended 30 June 2008

		Six months to 30 June 2008	Six months to 30 June 2007	Year to  31 December 2007
		Reviewed	Reviewed	Audited
		$'000	$'000	$'000
Cash flows from operating activities
(Loss)/profit before taxation		(118)	1,923	5,297
Adjustments for:
Depreciation of property, plant and equipment		623	312	714
Amortisation of intangible assets		11	-	7
Loss on disposal of property, plant and equipment		-	-	15
Share options expense		60	61	122
Interest receivable		(267)	(229)	(495)
Interest payable and similar charges		290	10	177
		----------	----------	----------
Profit and loss before working capital changes		599	2,077	5,837
Decrease/(increase) trade and other receivables		7,003	(550)	(7,396)
Increase in inventories		(1,697)	(622)	(940)
(Decrease)/increase in trade and other payables		(719)	25	131
Increase in taxes payable		81	77	42
		----------	----------	----------
Cash from/(used in) operations		5,267	1,007	(2,326)
Taxes paid		(1,401)	(680)	(1,055)
		----------	----------	----------
Net cash from/(used in) operating activities		3,866	327	(3,381)
		----------	----------	----------
Cash flows from investing activities:
Interest received		184	168	347
Purchase of property, plant and equipment		(753)	(1,325)	(2,708)
Purchase of intangible assets		(126)	(204)	(184)
Acquisition of subsidiary		(457)	-	-
		----------	----------	----------
Net cash used in investing activities		(1,152)	(1,361)	(2,545)
		----------	----------	----------
Cash flows from financing activities:
Proceeds from borrowings		2,556	-	6,190
Repayment of borrowings		(4,358)	-	(2,202)
Interest paid		(271)	(10)	(150)
		----------	----------	----------
Net cash (used in)/from financing activities		(2,073)	(10)	3,838
		----------	----------	----------
Net increase/(decrease) in cash and cash equivalents		641	(1,044)	(2,088)
Cash and cash equivalents at beginning of the year		8,156	9,448	9,448
Effects of exchange rate changes		131	199	794
		----------	----------	----------
Cash and cash equivalents at end of the period		8,928	8,603	8,154
		----------	----------	----------

Consolidated Statement of Changes in Shareholders' Equity

For the Period Ended 30 June 2008

	Share	Share	Other	Profit and	Total
	capital	premium	reserves	loss account	equity
	$'000	$'000	$'000	$'000	$'000
Period ended 30 June 2007
Profit for the period	-	-	-	1,431	1,431
Effect of exchange rates	-	-	359	-	359
	-------	---------	-------	-------	---------
Total recognised income and expense	-	-	359	1,431	1,790
Share options credit	-	-	61	-	61
Balance at 1 January 2007	2,965	11,194	4,357	5,525	24,041
	-------	---------	-------	-------	---------
Balance at 30 June 2007	2,965	11,194	4,777	6,956	25,892
	-------	---------	-------	-------	---------
Period ended 30 June 2008
Loss for the period	-	-	-	(602)	(602)
Effect of exchange rates	-	-	1,222	-	1,222
	-------	---------	-------	-------	---------
	-	-	1,222	(602)	620
Share options credit	-	-	60	-	60
Balance at 1 January 2008	2,965	11,194	6,218	9,263	29,640
	-------	---------	-------	-------	---------
Balance at 30 June 2008	2,965	11,194	7,500	8,661	30,320
	====	=====	====	====	=====

            1.    Basis of preparation

The financial information has been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2007.

    The financial information contained in this report has been prepared on the basis of the accounting policies presented below and has not been audited and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for the year ended 31 December 2007, which were prepared under IFRS as adopted by the EU, have been delivered to the Registrar of Companies.

    The auditors' opinion on those accounts was unqualified and did not contain a statement made under section 237(2) or section 237(3) of the Companies Act 1985.

2.    Significant accounting policies

    The financial information has been prepared under the historical cost convention.

 

    The accounting policies adopted and the methods of computation in the interim financial report are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2007.

            3.    Segment information

           The segment results for the period ended 30 June 2008 are as follows:

	Oilfield Process Chemicals	De-icing Solutions	Industrial Chemicals	Total
	$'000	$'000	$'000	$'000
Revenue	12,791	865	1,409	15,065
Segment operating profit/(loss)	783	-	(21)	762
Central costs				(1,028)
				----------
Operating loss				(266)
Finance costs and net  foreign exchange				148
				----------
Loss before taxation				(118)
Taxation				(484)
				----------
Loss for the period				(602)
				======

The segment results for the period ended 30 June 2007 are as follows:
	Oilfield Process Chemicals	De-icing Solutions	Industrial Chemicals	Total
	$'000	$'000	$'000	$'000
Revenue	7,371	4,716	1,200	13,287
Segment operating profit	942	1,329	221	2,492
Central costs				(841)
				----------
Operating profit				1,651
Finance costs and net foreign exchange				272
				----------
Profit before taxation				1,923
Taxation				(492)
				----------
Profit for the period				1,431
				======

4.    Earnings per share (EPS)

	Six months to 30 June 2008	Six months to 30 June 2007
(Loss)/profit for the period  ($'000)	(602)	1,431
	---------	---------
Number of shares - weighted average
Basic ('000)	172,321	172,321
Basic earnings per share (cents)	(0.35)	0.83
	----------	----------
Number of shares - weighted average
Diluted ('000)	172,321	172,321
Diluted earnings per share (cents)	(0.35)	0.83
	----------	----------

5.    Taxation

Despite the loss before tax for the six months ended 30 June 2008, there is a current tax charge of $0.5m as a result of profits earned in Russia. 

6.    Acquisition of subsidiary

On 18 January 2008, the Group acquired 100% of the share capital of Solith Anlagenbau und Service GmbH ('Solith').  Solith, located in Austria, specialises in the production and distribution of value added de-icing products, including calcium chloride derivative 'Brine C', used for motorway de-icing maintenance. The maximum consideration payable by Zirax is €3.7m, satisfied by a cash payment of €200,000 on completion, and the balance of up to €3.5m, payable via a two-tier performance related earn out arrangement for the sale of product in Austria over a maximum period of six years.  

The assets and liabilities arising from the acquisition, provisionally determined, are as follows:

As at 18 January 2008	Carrying value	Fair value adjustment	Fair value
	$'000	$'000	$'000
Property, plant and equipment	819	196	1,015
Inventories	179	143	322
Trade and other receivables	265	-	265
Trade and other payables	(730)	-	(730)
Borrowings	(1,244)	-	(1,244)
	--------	--------	--------
Net liabilities acquired	(711)	339	(372)
	=====	=====	=====
Purchase consideration:
Cash paid			323
Direct costs relating to acquisition			141
			--------
			464
Fair value of net liabilities acquired			372
			--------
Goodwill			836
			=====

Solith's loss for the period since acquisition was $0.4m. Because of the proximity of the acquisition to the start of the period, the revenue and loss of the group stated as if the acquisition had taken place at the start of the period, would not be significantly different to the revenue and loss disclosed in the income statement.

7.    Balances and transactions with related parties

    (i)    Balances with related parties:

    

Balance sheet caption	Relationship	Six months ended 30 June 2008	Six months ended 30 June 2007
		$'000	$'000
Trade receivable from and
prepayments to:
OAO Kaustik	Under common control	30	71
		----------	----------
		30	71
		======	======
Trade payables to:
OAO Plastcard	Under common control	71	1
OAO Kaustik	Under common control	636	942
OOO European Chemical	Other related party	4	6
		----------	----------
		711	949
		======	======

    

(ii)      Transactions with related parties:

    

Income statement caption	Relationship	Six months ended  30 June 2008	Six months ended  30 June 2007
		$'000	$'000
Revenue from transactions with:
OAO Kaustik	Under common control	104	162
		----------	----------
		104	162
		======	======
Inventory purchases:
OAO Kaustik	Under common control	4,361	3,575
OOO Evroles	Under common control	182	-
OOO European Chemical	Other related party	-	30
		----------	----------
		4,543	3,605
		======	======
Production services purchases:
OAO Kaustik	Under common control	294	347
		======	======

8.    Exchange rates

    

    Exchange rates for the US dollar during the period were:

    

    

	Average rate to   30 June 2008	Average rate to  30 June 2007	Average rate to  31 December 2007	Closing rate  at  30 June 2008	Closing rate at  30 June 2007	Closing rate at  31 December 2007
USD 1 - GBP	0.5043	0.5076	0.4996	0.5011	0.4990	0.5007
USD 1 - RR	23.8924	26.0714	25.5516	23.4573	25.8162	24.5462

ENDIR ILFLTAAITFIT